EconPapers    
Economics at your fingertips  
 

Liquidity cycles and make/take fees in electronic markets

Thierry Foucault, Ohad Kadan () and Eugene Kandel ()

No 920, HEC Research Papers Series from HEC Paris

Abstract: In this paper, the authors develop a dynamic model of trading with two specialized sides: traders posting quotes (“market makers”) and traders hitting quotes (“market takers”). Traders monitor the market to seize profit opportunities, generating high frequency make/take liquidity cycles. Monitoring decisions by market-makers and market-takers are self-reinforcing, generating multiple equilibria with differing liquidity levels and duration clustering. The trading rate is typically maximized when makers and takers are charged different fees or even paid rebates, as observed in reality. The model yields several empirical implications regarding the determinants of make/take fees, the trading rate, the bid-ask spread, and the effect of algorithmic trading on these variables. Finally, algorithmic trading can improve welfare because it increases the rate at which gains from trade are realized.

Keywords: liquidity; monitoring; make/take fees; duration clustering; algorithmic trading; two-sided markets (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2009-10-01
New Economics Papers: this item is included in nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3) Track citations by RSS feed

Downloads: (external link)
http://www.hec.fr/var/fre/storage/original/applica ... 4ec443446e6401bc.pdf (application/pdf)

Related works:
Journal Article: Liquidity Cycles and Make/Take Fees in Electronic Markets (2013) Downloads
Working Paper: Liquidity Cycles and Make/Take Fees in Electronic Markets (2013)
Working Paper: Liquidity cycles and make/take fees in electronic markets (2009) Downloads
Working Paper: Liquidity Cycles and Make/Take Fees in Electronic Markets (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:0920

Access Statistics for this paper

More papers in HEC Research Papers Series from HEC Paris HEC Paris, 78351 Jouy-en-Josas cedex, France. Contact information at EDIRC.
Bibliographic data for series maintained by Antoine Haldemann ().

 
Page updated 2021-04-15
Handle: RePEc:ebg:heccah:0920